In this study, we develop alternative dividend stickiness measures as a proxy for managerial reluctance to cut dividends and investigate the information content of dividend stickiness. We find that firms with stickier dividend payout have greater earnings persistence, earnings growth, and pricing multiples on earnings. Further analysis shows that the signaling effect of dividend stickiness on future earnings is more pronounced for firms with less catering incentives to avoid dividend cuts. Our results suggest that dividend stickiness has incremental explanation over dividend payout for signaling future earnings.
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A firm’s financial flexibility demand depends on the firm’s financial constraint and expected investment opportunities relative to expected cash flows. Blau and Fuller (2008), Lee et al. (2011), Chen et al. (2013), and Rapp et al. (2014) also show that a firm’s dividend payout reflects its financial flexibility.
The annaul dividends stickiness would be set as unidentified (missing) if we can’t find a pair of data with one positive and one negative change in earnings within 4 years. For instance, firms without any dividend payments within 4 years will be eliminated.
If managers are reluctant to pay more dividends when firms have more earnings, the dividends upward adjustment are “sticky”. However, based on our measure, it will less likely fall into dividend stickiness group. The reason is that we set the measure of dividend stickiness as a proxy for managerial reluctance of dividend “cut”. By the nature of setting, we focus on the dividend stickiness in terms of “downward” adjustment which has been well-documented in the literature (Brav et al. 2005).
We open a four-year window to determine dividend stickiness behavior as we try to find a balance between the demand for observations and measure validity. In other words, a greater demand for observations leads to a greater probability to well define our measure, but lose more sample used in the analyses for investigating our hypotheses.
As we apply adjustment factor (Compustat data item: 27) to calculate split-adjusted DPS, we also use the same factor to calculate adjusted-price in testing pricing multiples on dividend stickiness.
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Lin, J.J., Lee, CF. Does managerial reluctance of dividend cuts signal future earnings?. Rev Quant Finan Acc 56, 453–478 (2021). https://doi.org/10.1007/s11156-020-00899-5
- Dividend stickiness
- Earnings persistence
- Signaling theory
- Catering theory